Interpretation of Contract
Interpreting contracts in English law is an area of English contract law, which concerns how the courts decide what an agreement means. It is settled law that the process is based on the objective view of a reasonable person, given the context in which the contracting parties made their agreement. This approach marks a break with previous a more rigid modes of interpretation before the 1970s, where courts paid closer attention to the formal expression of the parties' intentions and took more of a literal view of what they had said. Restatements and Codifications Common Law Jurisdictions *statement of principles from judges, textbooks, law commissions, draft bill, etc *Bromwick, Rainy Sky, and Chartbook *Burrows, s14, pp11-12 *Andrews, para 14.01, pp357-9 *Calnan, p xi *by the American Law Institute * Other Jurisdictions *of european contract law 5:101 to 5.107 *Civil Code art 1156 *germany BGB *Principles for International commercial contracts *samuel * Summary of main points from the following sources: * judgements of lower trial court and court of appeal which summaries the law * Law Commission papers * Other government papers which the Crown holds the copyright * Might need to check the crown copyright law of each jurisdictions separately Extracts with notes do not include anything here which may appear to infringe copyright. Extract A: Investors Compensation Scheme v West Brownwich (No. 1)'' 1998 1 WLR 896 (HL) UKSC Press Release: think i can reprint it here without prior permission from them Facts: Held: : [Lord Hoffmann: : 27. dsdf : : ''Notes: :::: 1. Sdfsfdsfds. dsfjskl fjsldf dslf jsd ::::: Replies: ::::::: @john: I don’t see how.dfsdfsdf df jaldf lajf d fdkf ldf dlf dfadfdfadfafd ::::::: @jane: Yeah, right. ::::::: @willy: Of course it is. :::: :::: :::: 2. sdfsdf :::: 3. Sdfsdfdsf :::: 4. fsfsd :::: :::: Extract B: '''Rainy SKy v Kookmin Bank 2011 UKSC 50 ICLR Headnotes: link ::: UKSC Press Release: think i can reprint it here with prior permission from them ::: ::: Facts: This case concerns the correct construction of refund guarantees issued by the Respondent bank in relation to six shipbuilding contracts. In May 2007 the first to sixth claimants (‘the Buyers’) entered into shipbuilding contracts (‘the Contracts’) with Jinse Shipbuilding Co Ltd (‘the Builder’). Under the Contracts the Builder agreed to build and sell one vessel to each of the six Buyers. The price of each vessel was US$33.3m, which was to be paid in five equal instalments. Article X.8 of the Contracts stated that payment of the first instalment was conditional upon the Builder providing the Buyer with a satisfactory refund guarantee from a first class Korean bank. Article X.5 gave the Buyer a right to a full refund in the event that the Buyer exercised their right to reject the vessel or to terminate, cancel or rescind the Contract. Article XII.3 of the Contracts then gave the Buyers further rights to repayment of instalments paid in the event of a default by the Builder. In particular, Article XII.3 stated that if the Builder became subject to certain insolvency proceedings, “the Buyer may by notice in writing to the Builder require the Builder to refund immediately to the Buyer the full amount of all sums paid by the Buyer to the Builder”. As envisaged by Article X.8 of the Contracts, in August 2007 the Respondent bank issued each of the Buyers with materially identical Advanced Payment Bonds (‘the Bonds’). Paragraph 2 of the Bonds stated that, under the terms of the Buyer’s Contract with the Builder, the Buyer was entitled to a refund in the event that they exercised their right to reject the vessel or to terminate, cancel or rescind the Contract. The Respondent’s guarantee obligation was then set out in paragraph 3, which stated that the Respondent promised to pay the Buyer “all such sums due to you under the Contract”. The first line of paragraph 3 explained that this promise was given “in consideration of your agreement to make the pre-delivery instalments under the Contract”. Paragraph 4 stated that payment would be made upon receipt of a written demand from the Buyer stating that the Builder had failed to fulfil the terms of the Contract and specifying the amount claimed. Paragraph 5(v) stated that the Respondent’s liability under the Bonds would not be affected by “any insolvency, re-organisation or dissolution of the Builder”. Each of the Buyers duly paid the first instalment of US$6.66m due under the Contracts. One of the Buyers also subsequently paid a second instalment in the same amount. In 2008 the Builder experienced financial difficulties and in January 2009 it became subject to a formal debt workout procedure under the Korean Corporate Restructuring Promotion Law 2007. In April 2009 the Buyers wrote to the Respondent demanding repayment under the Bonds of the instalments that had been paid to the Builder under the Contracts. The Respondent rejected the Buyers’ demands on the basis that, on the true construction of the Bonds, the Respondent had not undertaken to guarantee payment of refunds arising under Article XII.3 of the Contracts. In the High Court the judge ruled in favour of the Buyer’s construction of the Bonds and entered summary judgment against the Respondent. On appeal, the majority of the Court of Appeal (Thorpe The Supreme Court of the United Kingdom Parliament Square London SW1P 3BD T: 020 7960 1886/1887 F: 020 7960 1901 www.supremecourt.gov.uk and Patten LJJ) overturned the High Court’s ruling and entered summary judgment in favour of the Respondent. Sir Simon Tuckey gave a dissenting judgment in which he explained his reasons for preferring the High Court judge’s construction of the Bonds. The Supreme Court granted the Appellants leave to appeal to the Supreme Court. Held: The issue at the heart of this appeal is whether, on the true construction of paragraph 3 of the Bonds, the Buyers are entitled to payment from the Respondent in respect of refunds that they are entitled to from the Builder under Article XII.3 of the Contracts 6. It was common ground that everything depends upon the true construction of the Bonds and that the terms and meaning of the Contracts are only relevant to the extent that they inform the true construction of the Bonds 7,10. Under paragraph 3 of the Bonds the Respondent promised to pay the Buyers “all such sums due to you under the Contract”. The question is therefore what was meant by “such sums”. On this point, neither Article X.5 nor Article X.8 was intended to set out all the circumstances in which the refund guarantee should operate 37. The Buyers said that the expression covered the “pre-delivery instalments” referred to in the first line of paragraph 3 – in other words, the phrase referred to all pre-delivery instalments paid by the Buyers. The Respondent, on the other hand, contended that the expression “such sums” was limited to the sums that were referred to in paragraph 2 of the Bonds. Since paragraph 2 did not include any reference to the Buyers’ rights under Article XII.3 of the Contracts to repayment upon the Builder’s insolvency, the Respondent was under no obligation to make any payment to the Buyers in the present case. On the face of it, the correct approach to the construction of the Bonds is not in dispute. The cases show that the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used. This process involves ascertaining what a reasonable person would have understood the parties to have meant. A reasonable person, for these purposes, is one who has all the background knowledge that would reasonably have been available to the parties in the situation in which they were at the time of the contract 14. The issue between the parties is the role to be played by considerations of business common sense in determining what the parties meant 15. Where the parties have used unambiguous language, the court must apply it 23. However if there are two possible constructions, it is generally appropriate to adopt the interpretation that is most consistent with business common sense and to reject the other 21, 29. It is not necessary to conclude that a particular construction would produce an absurd or irrational result before proceeding to have regard to the commercial purpose of the agreement 43. In the present case, since the language of paragraph 3 is capable of two meanings, it is appropriate for the court to have regard to considerations of commercial commonsense 40. Although the Buyers are unable to provide any very good reason why paragraph 2 was included in the Bonds 34, a construction of paragraph 3 which excluded the Builder’s insolvency from the situations that trigger the Respondent’s obligation to refund advance payments made by the Buyers would make no commercial sense 41. Accordingly, of the two arguable constructions of paragraph 3 of the Bonds, the Buyers’ construction is to be preferred because it is consistent with the commercial purpose of the Bonds in a way that the Respondent’s construction is not 45. ::: ::: Clark ::: ::: 21. dsdf ::: … ::: 47 ::: ::: Notes #dfasf #sdf #sdfsd # ::::: Replies: ::::: @anthonykennedy: I don’t see how.dfsdfsdf df jaldf lajf d fdkf ldf dlf dfadfdfadfafd ::::: @beverleymclachlin: Yeah, right. ::::: @lordsometimes: Of course it is. ::::: ''Extract C: Arnold v Britton'' 2015 UKSC 36 ICLR Summary UKSC Press Release: Facts: Oxwich Leisure Park contains ninety-one chalets, each of which is let for a period of 99 years from 25 December 1974 on very similar terms. The Appellants are the current tenants under 25 of the leases. 21 of these leases were granted between 1978 and 1991. Clause 3(2) of each lease contains a covenant to pay a service charge. Each lease also contains covenants by the lessor. One such covenant is to provide services to the Park, such as maintaining roads, paths, fences, a recreation ground and drains, mowing lawns, and removing refuse. The lessor also covenants in clause 4(8) that leases of other chalets “shall contain covenants on the part of the lessees thereof to observe the like obligations as are contained herein or obligations as similar thereto as the circumstances permit”. The Respondent, the current landlord, argues that the service charge provision in clause 3(2) requires the lessee to pay an initial annual service charge of £90, which increases at a compound rate of 10% for the first 70 chalets to be let, every three years, but for the last 21 chalets to be let, every year. The service charge provisions in four of the 70 leases were subsequently varied so that the increases were yearly rather than every three years. The language of the clause 3(2) differs in small respects between the leases, but a typical example is a covenant to “To pay to the Lessor without any deduction in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for first three years OR the first year of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent year period OR year or part thereof”. The issue on this appeal is whether the Respondent’s interpretation of clause 3(2) in those 25 leases, where the increase is to be every year, is correct. Held: The Supreme Court holds that the Respondent is correct and therefore dismisses the tenants’ appeal by a majority of 4-1 (Lord Carnwath dissenting). Lord Neuberger (with whom Lord Sumption and Lord Hughes agree) gives the lead judgment and Lord Hodge gives a concurring judgment. The Supreme Court of the United Kingdom Parliament Square London SW1P 3BD T: 020 7960 1886/1887 F: 020 7960 1901 www.supremecourt.uk REASONS FOR THE JUDGMENT When interpreting a written contract, the court must identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, focussing on the meaning of relevant words in their documentary, factual and commercial context. However, subjective evidence of any party’s intentions must be disregarded 14-15. In the present case, while reliance must be place on commercial common sense, this should not undervalue the importance of the language of the provision 17. Commercial common sense cannot be invoked by reference to facts which arose after the contract was made; it is only relevant to ascertaining how matters would or could have been perceived as at the date of the contract. The fact that an arrangement has worked out badly or even disastrously is not a reason for departing from the natural meaning of the language; neither is the fact that a certain term appears to be very imprudent. It is not the function of the court interpreting a contract to relieve a party from the consequences of imprudence or poor advice 19-20. Moreover, there exists no special principle of interpretation that service charge clauses are to be construed restrictively 23. The natural meaning of clause 3(2) is clear; the first half of the clause provides that the lessee is to pay an annual charge to reimburse the lessor for the costs of providing the services which he covenants to provide, and the second half of the clause identifies how that service charge is to be calculated, namely as a fixed sum, with a fixed annual increase. This choice is readily explicable; the parties assumed that the cost of providing the services would increase, and they wished to avoid arguments as to the cost of the service and the apportionment between the tenants. The reasonable reader of the clause would see the first half of the clause as descriptive of the purpose of clause 3(2), namely to provide for an annual service charge, and the second half as a quantification of that service charge 24-27. In the case of the 21 (now 25) leases which provide for an annual increase in the service, it is true that this has an alarming consequence; if one assumes a lease granted in 1980, the service charge would be over £2,500 this year, 2015, and over £550,000 by 2072. However, despite such consequences, this is not a convincing argument for departing from the natural meaning of clause 3(2) 30-32. Although there are one or two small errors in the drafting, nothing has gone significantly wrong with the wording of the clause in any of the 25 leases 34. Moreover, during the 1970s and much of the 1980s, annual inflation had been running at a higher annual rate than 10% for a number of years; the clause could be viewed as a gamble on inflation for both parties 35-36. In relation to the leases which were varied between 1998 and 2002, it is extraordinary that a lessee under a lease which provided for an increase in a fixed service charge at the rate of 10% over three years should have agreed to vary the lease so that the increase was to be at the rate of 10% per annum, at a time when inflation was running at around 3% per annum. However, this does not justify reaching a different result 39-40. The purpose of clause 4(8) and the opening words of clause 3 may well have been to create a “letting scheme” such that properties within a given area are intended to be let on identical or similar terms, normally by the same lessor, so that the terms are to be enforceable not only by the lessor against any lessee, but as between the various lessees 49. The Appellants’ case is that there is an implied term in each of the 21 leases granted between 1977 and 1991 such that the lessor is not asking anything of the lessee which had The Supreme Court of the United Kingdom Parliament Square London SW1P 3BD T: 020 7960 1886/1887 F: 020 7960 1901 www.supremecourt.uk not been required of lessees of other chalets, whether their leases were in the past or future. Even assuming that there is such a scheme, this would not be a correct term to imply. A term that the already existing 70 leases have services charges which increase at the compound rate of 10% p.a. as in the existing 21 leases would be inconsistent with an express term of the appellants’ leases 50-56. Accordingly, the appeal should be dismissed 60-65. In his dissenting judgment, Lord Carnwath considers that the commercial purpose of clause 3(2) was to enable the lessor to recover from the lessees the costs of maintaining the estate on their behalf, the payment by each lessee being intended to represent a “proportionate” part of the expenses incurred. He is of the view that the clause contained an inherent ambiguity between the two halves of the clause. 125-126. There are only two realistic possibilities for the meaning of the second part of the clause; either it is a fixed amount which supplants any test of proportionality under the first part or it is no more than an upper limit to the assessment of a proportionate amount 128. Lord Carnwath considers the consequences of the lessor’s interpretation to be so commercially improbable that only the clearest words would justify adopting it. For this reason he would have allowed the appeal 158-159. per Lord Neuberger "Interpretation of contractual provisions #Over the past 45 years, the House of Lords and Supreme Court have discussed the correct approach to be adopted to the interpretation, or construction, of contracts in a number of cases starting with Prenn v Simmonds 1971 1 WLR 1381 and culminating in Rainy Sky SA v Kookmin Bank [2011 UKSC 50]; [2011 1 WLR 2900]. #When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009 UKHL 38], [2009 1 AC 1101], para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions. In this connection, see Prenn at pp 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) 1976 1 WLR 989, 995-997 per Lord Wilberforce, Bank of Credit and Commerce International SA (in liquidation) v Ali [2002 1 AC 251], para 8, per Lord Bingham, and the survey of more recent authorities in Rainy Sky, per Lord Clarke at paras 21-30. #For present purposes, I think it is important to emphasise seven factors. #First, the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision. #Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve. #The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. Judicial observations such as those of Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974 AC 235], 251 and Lord Diplock in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) 1985 AC 191, 201, quoted by Lord Carnwath at para 110, have to be read and applied bearing that important point in mind. #Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party. #The fifth point concerns the facts known to the parties. When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties. Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties. #Sixthly, in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention. An example of such a case is Aberdeen City Council v Stewart Milne Group Ltd [2011 UKSC 56], 2012 SCLR 114, where the court concluded that "any … approach" other than that which was adopted "would defeat the parties' clear objectives", but the conclusion was based on what the parties "had in mind when they entered into" the contract (see paras 17 and 22). #Seventhly, reference was made in argument to service charge clauses being construed "restrictively". I am unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation. Even if (which it is unnecessary to decide) a landlord may have simpler remedies than a tenant to enforce service charge provisions, that is not relevant to the issue of how one interprets the contractual machinery for assessing the tenant's contribution. The origin of the adverb was in a judgment of Rix LJ in McHale v Earl Cadogan [2010 EWCA Civ 14], [2010 1 EGLR 51], para 17. What he was saying, quite correctly, was that the court should not "bring within the general words of a service charge clause anything which does not clearly belong there". However, that does not help resolve the sort of issue of interpretation raised in this case. : Notes and Questions: # # # # # # # Replies: @anthonykennedy: I don’t see how.dfsdfsdf df jaldf lajf d fdkf ldf dlf dfadfdfadfafd @beverleymclachlin: Yeah, right. @lordsometimes: Of course it is. ''Extract D: Chartbook v Persimmon Homes'' 2009 UKHL 38 ICLR Headnotes: link UKSC Press Release: think i can reprint it here with prior permission from them Facts: Held: HOffmann 27. … 47 Notes and Questions # Sdfsfdsfds. dsfjskl fjsldf dslf jsdlf # Sdfsdfsdf # Sdfsdfs # Fdsfds # Sdfsdf # Replies: @anthonykennedy: I don’t see how.dfsdfsdf df jaldf lajf d fdkf ldf dlf dfadfdfadfafd @beverleymclachlin: Yeah, right. @lordsometimes: Of course it is. 2. In Proctor & Gamble v Svenska Cellulosa 201 EWCS CIv 1413 :”22. Counsel sdfsdf” 3. Baroness Hale in Chartbrook v Persimmon Homes 39 # Sdfsdfsdf # Sdfsdfs # Fdsfds # Sdfsdf # Replies: @anthonykennedy: I don’t see how.dfsdfsdf df jaldf lajf d fdkf ldf dlf dfadfdfadfafd @beverleymclachlin: Yeah, right. @lordsometimes: Of course it is. '''Articles, Blogs and Commentaries This will be a collection of links to articles, blogs, speeches, podcasts, youtude videos etc in this area of law. Current Awareness This will be a list of current cases pending before the courts and in the news. Papers from Law Commission or Law Reform Commissions from all jurisdictions will also be presented here. Draft legislative proposal will be here as well. Summative Assessments do not include anything which infringe copyright Replies: Cross-References Burrows sdfsfds Chitty sdfsdfds H&M Hanbury & Martin Halsbury’s Trietel ALI